REIT Week 2010: Some Sectors Still Waiting for Recovery

If there were any overarching theme to Thursday's REIT Week 2010 general session, "Magnificent Milestones--A Look Ahead," it was this: some property types are fully in recovery, while others are still waiting for it, at least among REITs that specialize in one or another of the food groups.

If there were any overarching theme to Thursday’s REIT Week 2010 general session, “Magnificent Milestones – A Look Ahead,” it was this: some property types are fully in recovery, while others are still waiting for it, at least among REITs that specialize in one or another of the food groups. Namely, the retail and apartment sectors have emerged from the Great Recession with some energy, but office and industrial space are still, on the whole, slogging along.

Those are generalizations, of course, and as it happens, all the companies represented on the panel, whatever the property type, are doing well. Discussing retail was Arthur Coppola, chairman and CEO of Macerich; David Neithercut, president and CEO of Equity Residential, spoke on the apartment sector; Douglas Linde, president of Boston Properties Inc., offered his thoughts on office properties; and Bruce Duncan, president and CEO of First Industrial Realty Trust, talked on industrial space. Mike Kirby, chairman and director of research at Green Street Advisors Inc., moderated the discussion.

“The retail REIT sector is at the bottom of a trough, and things are definitely looking up,” said Coppola. The reason: retailers have adjusted to the new normal and they, too, are looking toward growth in the coming quarters and years.
“Retailers have changed their business models since 2008, cutting inventories and costs, and have managed to protect their margins,” Coppola explained. “Now they’re reporting nice profits, and that has them thinking about expansion.”

As for the apartment sector, Neithercut called the recovery surprisingly good – especially its timing. “We were expecting a recovery, just not quite as soon as it seems to be happening,” he said.

Apartment occupancies were generally stable during the recession, but there was a lot of downward pressure on rents, Neithercut continued. As jobs grow, demand will increase, but supply will not, since virtually no one’s developing – thus there will be upward pressure on rents.

Office properties should be so lucky. No one’s developing those, either, but jobs aren’t growing fast enough in most markets to spur much new demand as companies work through shadow space and otherwise rationalize their office-space use, noted Linde. “There are pockets of demand, but mostly the markets are lethargic,” he said.
But there will come a time when demand returns, he posited. And Boston Properties, for one, will be ready to develop again. “We have a wonderful hole in the ground in Manhattan that we’ll develop — someday.”

Industrial real estate is similarly bumping along the bottom, suffering high vacancies. Duncan sees longer-term hope, however, as the broader economy recovers. “By the end of 2010, we’ll see some positive absorption,” he predicted.

On the other hand, that isn’t going to translate to rental gains for industrial property owners for quite a while. “There’s going to be no upward pressure on industrial rents for at least two years,” Duncan said.